The energy sector SPDR (NYSEARCA:XLE) is down 6% YTD, after a near flat performance in 2011. Although oil prices are still at relatively high levels in the $85-$90 per barrel range, the threat of the EU crisis worsening and spilling over into China and the rest of the world are helping keep a lid on prices. However, we believe that the long-term outlook is promising in the face of a growing global economy, led by the BRIC countries, constrained supply, and the threat of an Iran-led crisis in the oil-rich Middle East. In this article, via an analysis based on the latest available Q1 institutional 13-F filings, we identify the small-cap oil & gas exploration & production company stocks that are being accumulated and those being distributed by the world's largest fund managers.
These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the oil & gas exploration & production group, adding a net $2.78 billion in Q1 to their $159.56 billion prior quarter position in the group. However, overall they are still under-weight the group by a factor of 0.55; that is, taken together, the 25 mega funds have invested 2.0% of their assets in the group, slightly more than half of the 3.7% weighting of the oil & gas exploration & production group in the overall market (for more general information on these mega funds, please look at the end of the article).
The following are the small-cap oil & gas exploration & production companies that these mega fund managers are most bullish about (see Table):
Rexx Energy Corp. (NASDAQ:REXX): REXX is an independent energy company operating in the Illinois and Appalachian Basins, and engaged in the product, exploration and development of oil, natural gas and natural gas liquids. Mega funds together added a net 7.98 million shares in Q1 to their 10.56 million share prior quarter position in the company, and taken together mega funds held $219 million or 35.1% of the outstanding shares.
The top buyer was Wellington Management, one of the largest private independent investment management companies in the world, with $634 billion in assets under management, that purchased 6.08 million shares. Other large mega fund purchasers included Wells Fargo & Co. (0.65 million shares), with $157 billion in 13-F assets, State Street Corp. (0.64 million shares), with over $2 trillion in assets under management, and Vanguard Group (0.51 million shares), with $1.7 trillion in assets under management. Overall, institutional investors loaded up on REXX in Q1, adding 7.6 million shares to their 38.5 million share prior quarter position.
In its latest Q1 (March), REXX beat analyst earnings estimates (11c v/s 7c), at least the fourth beat in a row. Revenue growth has also been strong, with it reporting $33.8 million in revenue, up 46% year-over-year. Furthermore, it exceeded its first quarter production high case guidance, and increased its FY 2012 production guidance to 67-72 MMcfed/d. However, the company derives most of its revenues from natural gas, and although a majority of its production is hedged, it is still vulnerable to still lower natural gas prices, a possibility if the macro-economic weakness in EU continues, and spreads to China and elsewhere.
Other small-cap oil & gas exploration & production companies that mega fund managers are bullish about include:
- Stone Energy Corp. (NYSE:SGY), an independent oil & natural gas company headquartered in Lafayette, LA, that is engaged in the acquisition, exploitation and operation of oil & gas properties located in the Gulf Coast Basin, in which mega funds together added a net 3.38 million shares to their 16.06 million share prior quarter position in the company; and
- Quicksilver Resources (NYSE:KWK), a leader in the development and production of unconventional resources, including coal bed methane, shale gas, and tight sand gas in North America, in which mega funds together added a net 4.71 million shares to their 39.20 million share prior quarter position in the company.
The following are small-cap oil & gas exploration & production companies that mega funds are bearish about (see Table):
- Northern Oil & Gas Inc. (NYSEMKT:NOG), engaged in the exploration and production of oil and natural gas within the Williston Basin in ND and MT, in which mega funds together cut a net 3.70 million shares from their 27.50 million share prior quarter position in the company;
- EXCO Resources Inc. (NYSE:XCO), that is an independent oil and natural gas company, engaged in the exploration, exploitation, development and production of onshore North American oil and natural gas properties with a focus on shale resource plays, in which mega funds together cut a net 4.08 million shares from their 38.06 million share prior quarter position in the company;
- Clean Energy Fuels Corp. (NASDAQ:CLNE), founded by famed energy investor and hedge fund manager Boone Pickens, provides natural gas as an alternative fuel to vehicle fleets in the U.S. and Canada, including customers in the refuse, transit, shuttle, taxi, intrastate and interstate trucking, airport and municipal fleet markets, in which mega funds together cut a net 1.87 million shares from their 12.91 million share prior quarter position in the company;
- Forest Oil Corp. (NYSE:FST), that is engaged in the exploration and production of oil, natural gas and natural gas liquids primarily in North America, with interest in the Texas Panhandle, the Western Canadian Sedimentary Basin in Alberta and British Columbia, the Eagle Ford Shale in South Texas, and the East Texas/North Louisiana area, with 76% of its proved reserves being natural gas, in which mega funds together cut a net 3.76 million shares from their 31.07 million share prior quarter position in the company;
- PDC Energy Inc. (PETD), engaged in the exploration and production of natural gas, natural gas liquids and crude oil in the Colorado and Appalachian basins, in which mega funds together cut a net 0.65 million shares from their 13.50 million share prior quarter position in the company; and
- Penn Virginia Corp. (NYSE:PVA), an independent oil & gas exploration & production company operating in Texas, Appalachia, the Mid-Continent and Mississippi, in which mega funds together cut a net 2.12 million shares from their 19.56 million share prior quarter position in the company.
Furthermore, the following are additional small-cap oil & gas exploration & production companies that are among the top holdings of mega funds in the group (see Table):
- Swift Energy Co. (NYSE:SFY), an independent oil & gas exploration & production company, focused on U.S. onshore natural gas reserves located in TX and LA, in which mega funds together hold 17.01 million or 39.7% of the outstanding shares;
- Carrizo Oil & Gas (NASDAQ:CRZO), that is engaged in the exploration, development and production of oil and natural gas in the U.S. and the U.K., in which mega funds together hold 13.10 million or 33.1% of the outstanding shares;
- W&T Offshore Inc. (NYSE:WTI), that is engaged in the exploration and production of oil and natural gas, primarily in the Gulf of Mexico area, in which mega funds together hold 14.16 million or 19.1% of the outstanding shares; and
- Magnum Hunter Resources (MHR), an independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties in the U.S., primarily in WV, ND, TX and LA, in which mega funds together hold 34.92 million or 21.0% of the outstanding shares;
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.